Moody's has downgraded the credit ratings of several small and mid-sized U.S. banks and has placed several Wall Street big names on negative review. The downgrade comes as concerns grow about banks with substantial unrealized losses that are not reflected in their regulatory capital ratios, making them vulnerable to sudden losses in market or consumer confidence in a high interest rate environment.
Though authorities went to great lengths to restore confidence, Moody's warned that banks with substantial unrealized losses that are not captured by their regulatory capital ratios may still be susceptible to sudden losses of market or consumer confidence in a high interest rate environment.in July lifted its benchmark borrowing rate to a 5.25%-5.5% range, having tightened monetary policy aggressively over the past year and a half in a bid to rein in sky-high inflation.
"Interest rates are likely to remain higher for longer until inflation returns to within the Fed's target range and, as noted earlier, longer-term U.S. interest rates also are moving higher because of multiple factors, which will put further pressure on banks' fixed-rate assets." "Risks may be more pronounced if the U.S. enters a recession – which we expect will happen in early 2024 – because asset quality will worsen and increase the potential for capital erosion," the analysts added.
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